(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The chip sector has been one of the strongest sectors in the stock market in 2018, with the iShares PHLX Semiconductor ETF (SOXX) up by nearly 14.4%, easily outperforming the S&P 500 rise of only 4.2%. Believe it or not, there are still stocks in the group that are undervalued based on analysts' price targets by 10% or more, and could continue to rise. Three such stocks are Broadcom Ltd. (AVGO), Lam Research Corp. (LRCX) and Applied Materials Inc. (AMAT).
The average price target on Broadcom is nearly 26% higher than the stock closing price of $253.78 on March 9, while Lam Research and Applied Materials are trading nearly 12% below their respective price targets. Even from a valuation perspective, these companies all trade with one-year forward earnings multiples between 12 and 14, well below the nearly 17.5 one-year forward multiples of the S&P 500 Information Technology Index, according to data from S&P DowJones.
Broadcom has an average price target of nearly $321 according to data from Ycharts, and an upside of almost 26% from its closing price of $254.78 on March 9. About 93% of the 28 analysts that cover the stock have a buy or outperforming rating on shares versus only 7% that have a hold rating. The stock trades at just 12 times one-year forward earnings of $20.84, which makes the stock the cheapest of the three mentioned in this article. (For related reading, see also: Broadcom Falls on Brocade Miss.)
Lam Research is seen by analysts to be rising to approximately $252, based on the average price target—an increase of 11.7% from its current price around $224.95 on March 9. Nearly 90% of the 19 analysts that cover the stock rate it a buy or outperform, with only two having a hold or underperform rating. Shares only trade at 13.9 times one-year forward earnings estimate of $16.15.
Applied Materials has an average price target of about $69 and is seen rising by about 12% from its closing price of $61.61 on March 9. Nearly 96% of the 23 analysts that cover the stock have a buy or outperform rating on the stock, versus only one that has an underperform rating. Shares trade only 13.2 times one-year forward estimates of $4.65. (For more, see also: Applied Materials Reports in Correction Territory.)
All three stocks trade at a discount to the broader technology sector, and could present upside from current levels.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.